News

LLC OR S CORPORATION: WHICH IS BETTER FOR YOUR BUSINESS?

An S corporation is not a business entity like an LLC; it is an elected tax state.

LLC owners must pay self-employment tax on all income. S-corp owners can pay less for this tax, as long as they pay themselves “reasonable wages.”

LLC can have an unlimited number of members, but S-corp is limited to 100 shareholders. This article is intended for entrepreneurs who are trying to decide whether to build a business as an LLC or S corporation. When you start a business, you have several types of businesses to choose from. LLCs and S corporations are popular options, but they differ in many ways, from taxation to management structure. In some cases, the company can be either LLC or S-corp. Before deciding which business is right for your business, you need to understand these types of businesses and their differences.

What is a limited liability company?

LLC is an abbreviation for “limited liability company” and is a business structure that protects the personal assets of business owners (called “members”). If a business is involved in a legal dispute or is issued by a debt collector, the plaintiff or creditor can only track the assets of the business, not the personal assets of LLC members.

If an LLC is taxed as a sole proprietorship, it has the tax advantage of being a pass-through entity, meaning its profits “pass-through” the business to members of the LLC, so they can report the profits on their tax returns. Personal tax, Instead of filing a corporate tax return.  Alternatively, an LLC can be taxed as an S-corp, meaning members must be paid a S Corp Reasonable Salary, which the LLC reports as a business expense, and payroll taxes are deducted. The company’s remaining earnings are distributed as dividends.

Key Takeaways: LLCs protect members’ personal assets from business creditors. It is a pass-through entity, so members of the LLC report income on their individual tax returns.

What is an S Corporation?

An S corporation, also known as an S corporation or sub-chapter S, is a tax election that lets the IRS know that your business is taxed as a partnership. It also prevents your company from incurring double taxation at the corporate level. To become an S-corp, your business must first be registered as a C corporation or LLC.

In an S-corp, business owners are called shareholders. As the owner, you are considered an employee of the company and must be paid a Reasonable Salary for S Corp Owners gains, losses, deductions, and credits are taxed at the shareholder level.

To qualify as an S-corp, your company can have between 1 and 100 shareholders. Your business must also be located in the U.S., and you must file with the IRS as a U.S. corporation.

Key Point: An S corporation is not a business, it is a tax option. The tax liability of a sole proprietorship or S-corps belongs to the members or shareholders. LLCs can also be filed as S-corps.

What is the difference between LLC and S-corp?

Small business owners often choose to structure themselves as an LLC because it offers more freedom than a corporate structure. But before making this critical decision, it’s important to understand the difference between an LLC and an S-corp.

Tax difference

An S-corp is not a business entity such as a limited liability company, sole proprietorship, partnership, or corporation. Rather, it is the chosen method of determining how your business will be taxed. A company with S-corp tax status can avoid double taxation, where the company pays taxes on its profits first and then on any dividends that shareholders receive as personal income.

An LLC can be an S corporation or even a C corporation, depending on how the business owner decides to pay taxes. LLCs are a matter of state law, while S-corps are a matter of federal tax law.

In an LLC, members must pay self-employment taxes, namely Social Security and Medicare taxes, directly to the IRS. These rates change each year, but the self-employment income tax rates for 2020 are 12.4% for Social Security and 2.9% for Medicare, according to the IRS. 

For an S-corp, shareholders receive wages and the company pays payroll taxes, which can be deducted from the company’s taxable income as a business expense. If the company has any residual profits, they are distributed to shareholders as dividends at a lower tax rate than regular income.

 

Related Articles

Leave a Reply

Back to top button